Securities and Exchange Com'n v. Texas Gulf Sulphur Co., No. 296

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Writing for the CourtSection 10(a), 15 U.S.C. § 78j provides
Citation401 F.2d 833
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. TEXAS GULF SULPHUR CO., a Texas Corporation, Charles F. Fogarty, Richard D. Mollison, Walter Holyk, Kenneth H. Darke, Francis G. Coates, Claude O. Stephens, John A. Murray, Earl L. Huntington, and Harold B. Kline, Defendants-Appellees. SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. David M. CRAWFORD and Richard H. Clayton, Defendants-Appellants.
Decision Date13 August 1968
Docket NumberDocket 30882.,No. 296

401 F.2d 833 (1968)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant,
v.
TEXAS GULF SULPHUR CO., a Texas Corporation, Charles F. Fogarty, Richard D. Mollison, Walter Holyk, Kenneth H. Darke, Francis G. Coates, Claude O. Stephens, John A. Murray, Earl L. Huntington, and Harold B. Kline, Defendants-Appellees.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee,
v.
David M. CRAWFORD and Richard H. Clayton, Defendants-Appellants.

No. 296, Docket 30882.

United States Court of Appeals Second Circuit.

Argued March 20, 1967.

Submitted May 2, 1968.

Decided August 13, 1968.


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Philip A. Loomis, Jr., Gen. Counsel, David Ferber, Sol., Roger S. Foster, Sp. Counsel, Ofc. of Policy Research, SEC, Frank E. Kennamer, Jr., Asst. Gen. Counsel, Donald M. Feuerstein, Atty., SEC, for Securities and Exchange Commission

Orison S. Marden, White & Case, William D. Conwell, Edward C. Schmults, P. R. Konrad Knake, Thomas McGanney, Peter G. Eikenberry, New York City, for Texas Gulf Sulphur, Fogarty, Mollison, Holyk, Darke, Stephens, Murray, Huntington and Kline, for Crawford and Clayton.

Albert R. Connelly, Donald I. Strauber, Cravath, Swaine & Moore, New York City, for Coates.

Before LUMBARD, Chief Judge, and WATERMAN, MOORE, FRIENDLY, SMITH, KAUFMAN, HAYS, ANDERSON and FEINBERG, Circuit Judges.

Submitted to in Banc Court May 2, 1968.

WATERMAN, Circuit Judge:

This action was commenced in the United States District Court for the Southern District of New York by the Securities and Exchange Commission (the SEC) pursuant to Sec. 21(e) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. § 78u(e), against Texas Gulf Sulphur Company (TGS) and several of its officers, directors and employees, to enjoin certain conduct by TGS and the individual defendants said to violate Section 10(b) of the Act, 15 U.S.C. Section 78j(b), and Rule 10b-5 (17 CFR 240.10b-5) (the Rule), promulgated thereunder, and to compel the rescission by the individual defendants of securities transactions assertedly conducted contrary to law.1 The complaint alleged (1) that defendants Fogarty, Mollison, Darke, Murray, Huntington, O'Neill, Clayton, Crawford, and Coates had either personally or through agents purchased TGS stock or calls thereon from November 12, 1963 through April 16, 1964 on the basis of material inside information concerning the results of

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TGS drilling in Timmins, Ontario, while such information remained undisclosed to the investing public generally or to the particular sellers2; (2) that defendants
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Darke and Coates had divulged such information to others for use in purchasing TGS stock or calls3 or recommended its purchase while the information was undisclosed to the public or to the sellers;4 that defendants Stephens, Fogarty,
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Mollison, Holyk, and Kline had accepted options to purchase TGS stock on Feb. 20, 1964 without disclosing the material information as to the drilling progress to either the Stock Option Committee or the TGS Board of Directors; and (4) that TGS issued a deceptive press release on April 12, 1964. The case was tried at length before Judge Bonsal of the Southern District of New York, sitting without a jury. Judge Bonsal in a detailed opinion5 decided, inter alia, that the insider activity prior to April 9, 1964 was not illegal because the drilling results were not "material" until then; that Clayton and Crawford had traded in violation of law because they traded after that date; that Coates had committed no violation as he did not trade before disclosure was made; and that the issuance of the press release was not unlawful because it was not issued for the purpose of benefiting the corporation, there was no evidence that any insider used the release to his personal advantage and it was not "misleading, or deceptive on the basis of the facts then known," 258 F.Supp. 262, at 292-296 (SDNY 1966). Defendants Clayton and Crawford appeal from that part of the decision below which held that they had violated Sec. 10(b) and Rule 10b-5 and the SEC appeals from the remainder of the decision which dismissed the complaint against defendants TGS, Fogarty, Mollison, Holyk, Darke, Stephens, Kline, Murray, and Coates.6

For reasons which appear below, we decide the various issues presented as follows:

(1) As to Clayton and Crawford, as purchasers of stock on April 15 and 16, 1964, we affirm the finding that they violated 15 U.S.C. § 78j(b) and Rule 10b-5 and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy.

(2) As to Murray, we affirm the dismissal of the complaint.

(3) As to Mollison and Holyk, as recipients of certain stock options, we affirm the dismissal of the complaint.

(4) As to Stephens and Fogarty, as recipients of stock options, we reverse the dismissal of the complaint and remand for a further determination as to whether an injunction, in the exercise of the trial court's discretion, should issue.

(5) As to Kline, as a recipient of a stock option, we reverse the dismissal of the complaint and remand with directions to issue an order rescinding the option and for a determination of any other appropriate remedy in connection therewith.

(6) As to Fogarty, Mollison, Holyk, Darke, and Huntington, as purchasers of stock or calls thereon between November 12, 1963, and April 9, 1964, we reverse the dismissal of the complaint and find that they violated 15 U.S.C. § 78j(b) and Rule 10b-5, and remand, pursuant to the agreement of all the parties, for a determination of the appropriate remedy.

(7) As to Clayton, although the district judge did not specify that the complaint be dismissed with respect to his purchases of TGS stock before April 9,

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1964, such a dismissal is implicit in his treatment of the individual appellees who acted similarly. Consequently, although Clayton is named only as an appellant our decision with respect to the materiality of K-55-1 renders it necessary to treat him also as an appellee. Thus, as to him, as one who purchased stock between November 12, 1963 and April 9, 1964, we reverse the implicit dismissal of the complaint, find that he violated § 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy

(8) As to Darke, as one who passed on information to tippees, we reverse the dismissal of the complaint and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy.

(9) As to Coates, as one who on April 16th purchased stock and gave information on which his son-in-law broker and the broker's customers purchased shares, we reverse the dismissal of the complaint, find that he violated 15 U.S.C. § 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy.

(10) As to Texas Gulf Sulphur, we reverse the dismissal of the complaint and remand for a further determination by the district judge in the light of the approach taken in this opinion.

The occurrences out of which this litigation arose are not set forth hereafter in as detailed a manner as they are set out in the published opinion of the court below, but are stated sufficiently, we believe, for the exposition of the issues raised by the several appeals to us.

THE FACTUAL SETTING

This action derives from the exploratory activities of TGS begun in 1957 on the Canadian Shield in eastern Canada. In March of 1959, aerial geophysical surveys were conducted over more than 15,000 square miles of this area by a group led by defendant Mollison, a mining engineer and a Vice President of TGS. The group included defendant Holyk, TGS's chief geologist, defendant Clayton, an electrical engineer and geophysicist, and defendant Darke, a geologist. These operations resulted in the detection of numerous anomalies, i. e., extraordinary variations in the conductivity of rocks, one of which was on the Kidd 55 segment of land located near Timmins, Ontario.

On October 29 and 30, 1963, Clayton conducted a ground geophysical survey on the northeast portion of the Kidd 55 segment which confirmed the presence of an anomaly and indicated the necessity of diamond core drilling for further evaluation. Drilling of the initial hole, K-55-1, at the strongest part of the anomaly was commenced on November 8 and terminated on November 12 at a depth of 655 feet. Visual estimates by Holyk of the core of K-55-1 indicated an average copper content of 1.15% and an average zinc content of 8.64% over a length of 599 feet. This visual estimate convinced TGS that it was desirable to acquire the remainder of the Kidd 55 segment, and in order to facilitate this acquisition TGS President Stephens instructed the exploration group to keep the results of K-55-1 confidential and undisclosed even as to other officers, directors, and employees of TGS. The hole was concealed and a barren core was intentionally drilled off the anomaly. Meanwhile, the core of K-55-1 had been shipped to Utah for chemical assay which, when received in early December, revealed an average mineral content of 1.18% copper, 8.26% zinc, and 3.94% ounces of silver per ton over a length of 602 feet. These results were so remarkable that neither Clayton, an experienced geophysicist, nor four other TGS expert witnesses, had ever seen or heard of a comparable initial exploratory drill hole in a base metal deposit. So, the trial court concluded, "There is no doubt that the drill core of K-55-1 was unusually

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good and that it excited the interest and speculation of those who knew about it." Id. at 282. By March 27, 1964, TGS decided that the land acquisition program had advanced to such a point that the company might well...

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    ...with a tender offer investment decision that would otherwise ``jump the gun'' on a merger. \44\ See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833,848 (2d Cir. \45\ Id. at 862; Basic v. Livinson, 485 U.S.C. 224 (1988). \46\ See Ross v. A.H. Robins Co., Inc., 465 F. Supp. 904 (S.D.N.Y.), rev'd ......
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    ...of their company without disclosing to them non-public information that is material to the transaction. In SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968), (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), the Second Circuit held that corporate insiders ......
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    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 4, 1999
    ...defendant's failure to disclose material information." Id. at 748 (citing the line of cases beginning with SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc), and culminating in Affiliated Ute Citizens v. United States, Page 341 U.S. 128, 153-54, 92 S.Ct. 1456, 31 L.E......
  • S.E.C. v. Caserta, No. 97-CV-7091 (FB).
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    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • December 8, 1999
    ...Inc., 958 F.Supp. 846, 861-62 (S.D.N.Y.1997) (Sotomayor, J.), aff'd, 159 F.3d 1348 (2d Cir.1998) (Table); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 859 (2d Cir.1968) (en banc). "Section 10(b) and Rule 10b-5 liability can flow from `misstatements and omissions in press releases, news arti......
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841 cases
  • US v. Lang, Crim. No. WN-90-0404.
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    • U.S. District Court — District of Maryland
    • February 21, 1991
    ...of their company without disclosing to them non-public information that is material to the transaction. In SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968), (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), the Second Circuit held that corporate insiders ......
  • Dietrich v. Bauer, No. 95 Civ. 7051(RWS).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 4, 1999
    ...defendant's failure to disclose material information." Id. at 748 (citing the line of cases beginning with SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc), and culminating in Affiliated Ute Citizens v. United States, Page 341 U.S. 128, 153-54, 92 S.Ct. 1456, 31 L.E......
  • S.E.C. v. Caserta, No. 97-CV-7091 (FB).
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    • December 8, 1999
    ...Inc., 958 F.Supp. 846, 861-62 (S.D.N.Y.1997) (Sotomayor, J.), aff'd, 159 F.3d 1348 (2d Cir.1998) (Table); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 859 (2d Cir.1968) (en banc). "Section 10(b) and Rule 10b-5 liability can flow from `misstatements and omissions in press releases, news arti......
  • Federal Deposit Ins. Corp. v. Kerr, No. C-C-85-74-P.
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    • June 13, 1986
    ...practices of securities exchange and to insure fairness and honesty in security transactions generally. SEC v. Texas Gulf Sulpher Co., 401 F.2d 833 (2d Cir. 1968). The statute and rule should be broadly construed to effectuate their remedial purposes. Tchereprin v. Knight, 389 637 F. Supp. ......
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3 firm's commentaries
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    ...then on leave from Columbia to lead the SEC during the Kennedy administration. [27] Cady, Roberts. [28] SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968). [29] Carpenter v. U.S., 791 F.2d 1024 (2d Cir. 1986), aff’d by equally divided court, 484 U.S. 19, 24 (1987) (journalist with p......
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